Life Insurance: How should you have it?
Life Insurance: Do You Need It?
The answer to whether or not you need life insurance is a personal one. It depends on your personal and financial circumstances. You can consider purchasing life insurance if you fall in one of the following categories:
• You are married and your spouse depends on your income
• You have children
• You have an aging parent or disabled relative who depends on you for support
• Your retirement savings and pension won't be enough for your spouse to live on
• You have a large estate and expect to owe estate taxes
• You own a business, especially if you have a partner
• You have a substantial joint financial obligation such as a personal loan for which another person would be legally responsible after your death
What kind of Life Insurance do I need?
There are different types of Life Insurance, but they generally fall into two categories: term insurance and permanent insurance. Permanent life insurance is designed to protect you throughout your lifetime. It comes in two basic forms: whole life insurance and universal life insurance. The most popular type of life insurance policy is term life insurance as it suits most people's needs. Term insurance provides the maximum death protection against the most affordable premiums. You can choose term periods from 1 to 30 years. It pays a benefit only if the insured dies during this specific period or term. However, if you have long term needs, you may prefer to opt for permanent life insurance. Permanent Life insurance coverage is useful when you anticipate a long-term need and value the option of income-tax-favored accumulation for future needs. Whole life is the most common type of permanent life insurance.
How much coverage do you need?
There is no simple answer to that question. Some financial planners say you need enough insurance to replace five to seven years of your salary. If you have young children or significant debt, you should bump up your coverage so you have enough to replace as much as 10 years of your salary, they say. That would mean a person making $50,000 a year should have anywhere from $250,000 to $500,000 worth of coverage or more. In most cases, if you have no dependents and have enough money to pay your final expenses, you don't need any life insurance. If you want to create an inheritance or make a charitable contribution, buy enough life insurance to achieve those goals. Many experts recommend buying life insurance equal to a multiple of your salary, but this approach ignores other sources of income.
Term life insurance provides coverage for a limited period of time. You generally pay premiums on a monthly or annual basis and your family is protected for that "term". It is the simplest and usually the cheapest type of life insurance that stays in effect for a specified period or until a certain age of the insured. It pays the face amount of the policy in case the insured dies within the coverage period (term) but pays nothing if he or she outlives it. Also, (unlike in whole life insurance) whereas it premium cost is low in younger years, it generally increases rapidly with the age of the insured. Term life insurance is used commonly as an insurance cover for a loan repayment or post-death liabilities such as estate taxes. The applicant may opt for a 5 year term, a 10 year term, a 15 year term, a 20 year term, a 25 year term or a 30 year term policy. Some term policies may be kept up until ages 65, 80 or age 90, or 95. Term insurance has no equity or cash value accumulation and so it is primarily purchased for the security provided by the death benefit.
There are two basic forms of term life insurance: Annually Renewable Term Life Insurance and Level Term Life Insurance. For Annually Renewable Term, premiums start out lower than level term premiums and increase each year. The simplest form of term life insurance is for a term of one year. This form of term insurance is the least recognized of all term policies. For Level Term Life Insurance, premiums are initially higher than annually renewable term but remain level for a set period of time, normally 10 or 20 years, then the contract ends. A new policy can be applied for at a higher rate as long as you still qualify. Most level term programs include a renewal option and allow the insured to renew for a maximum guaranteed rate if the insured period needs to be extended. Most term life policies include an option to convert the term life policy to a Universal Life or Whole Life policy. This option can be useful to a person who acquired the term life policy with a preferred rating class and later is diagnosed with a condition that would make it difficult to qualify for a new term policy. The new policy is issued at the rate class of the original term policy. Note that this right to convert may not extend to the end of the Term Life policy. It may extend a fixed number of years or to a specified age, such as convertible to age 70.
